7 Inheritance Mistakes and How to Avoid Them

3. Trust issues

You want to leave money for all your kids, but you’re concerned about Neil, the youngest, and his fondness for blackjack tables.

A trust comes in handy here. It’s a legal document that lets you specify how you want your assets distributed after your demise. It’s ideal for “any situation that needs structure,” says Davis. It’s controlled by a trustee you appoint, who has the power to make decisions in line with your stated wishes.

You can set up a trust to distribute money at certain ages. You can encourage positive behavior, such as by matching a child’s earnings dollar for dollar. You can restrict funds for children engaging in harmful activities, says Hartney. But to avoid making a trust inflexible, you might appoint what’s known as a trust protector. That person can modify a trust in response to changing circumstances while maintaining fidelity to your original intent, she says.

Andre Rucker

To set up a trust with conditions that are practicable and enforceable, you’ll need to work with a trusts and estates attorney, which could cost a few thousand dollars. You’ll also need to specify how the trust will be funded. When selecting a trustee, consider a close friend, family member or professional trustee — but not your troubled child’s more responsible sibling. That’s “a recipe for disaster,” Hartney says. If you’re concerned about one child feeling singled out, you can create an appropriate trust for each of your offspring.

Finally, tell your children about the trust. Says Michael Lehman, CEO of investment adviser Premier Path Wealth Partners in Madison, New Jersey, “We’ve had adult children inherit assets in the form of a trust, with no prior communication, and resent the fact that restrictions have been placed on their inheritance.”

4. A blended family

At the risk of sounding like the evil stepparent, you want to leave your assets to your new spouse and your kids from a previous marriage — not to your stepchildren.

Go ahead, play favorites. “It’s common for spouses in second marriages to want their spouse and kids, but not their spouse’s children, to receive money,” says Elliott Appel, founder of Kindness Financial Planning in Madison, Wisconsin.

Whatever you do, don’t assume that if you leave everything to your spouse, he or she will kindly bequeath what’s left to your kids. Instead, as in the previous time bomb, consider a trust. A common strategy is to leave money to support a surviving spouse while designating that, upon the spouse’s death, the remainder go to your children.

The tricky part is picking a trustee. If your surviving spouse is the trustee, that person has total control and could spend recklessly, leaving less for your children, says Appel. If you name your kid, your spouse has the awkward task of asking that child for money. Hiring a professional could reduce conflicts.

If you set up a trust that initially provides for your spouse, “give your kids the right to annual accountings” so they see how the money is being used, says Harry S. Margolis, author of The Baby Boomers Guide to Trusts. “Transparency can often prevent abuse.”

“You might also want to give your children something directly upon your death so that they’re not waiting for their stepparent to die,” adds Margolis. This is particularly sensible, he says, if your spouse is much younger than you.

5. It’s a business

Your family business is your passion and life’s work. Only one child has been involved, but you have two other kids. How do you create a plan that doesn’t turn into a made-for-TV drama?

There are several ways to handle this, depending on your business’ current valuation, the sweat equity of the child involved and the worth of your overall estate.

Here’s what not to do: “Do not put that one child in a situation where decisions about the business suddenly involve the passive siblings,” warns Davis. The last thing you want is a forced partnership with an inexperienced brother or an estranged sister.

Ideally, you’re wealthy enough to give the business to one child and assets of equal value to the others. But that’s usually not the case.

Among your options: Issue voting and nonvoting shares so that the less-involved kids get the benefits but don’t have a say in how the company is run. Or you can give the active child a higher percentage of company ownership and equalize the estate by allocating other liquid assets to the other children, says Lehman. Both those tactics come with pitfalls. Passive and not-as-active children may want dividends or push to sell the business, while the active child may want to reinvest and grow the company from which they may be drawing a salary, says Handler.

A typical case that Handler knows of involved five children, only two of whom were active in the father’s business. One possible solution was leaving ownership to all the children but putting the two involved sons in control; another was to leave the business to those two sons and bequeath the remaining assets to the other children.

“Neither solution would make every­one happy,” says Handler. “The sons don’t want the others making money from their efforts under option one, and the other siblings might end up with much less than their brothers in option two.” Ultimately, the father sold the business to the active sons while he was still alive, then divided his estate equally among all the children.

Advice from a professional can be a lifesaver in this situation, whether you work with a financial planner, a lawyer or a business consultant specializing in family-firm succession.

6. Skipping generations

Your kids seem capable and secure as adults, so you’ve decided to mostly bypass them and pass your wealth to your grandkids instead.

Your heart might be in the right place, but you could be setting your kids and their children up for family strife and a bureaucratic mess.

“If the child is a minor, at least in some states, a guardianship account may need to be opened and supervised by the courts until the child reaches the age of majority,” says Andy Arnold, CEO at financial planning firm Centerline Wealth Advisors in Louisville, Kentucky. He warns that this process can be cumbersome and time-consuming.

Andre Rucker

You might also end up undermining your child’s parental power. “If a grandkid knows they have money waiting in the wings from grandparents, they can snub their parents’ disciplinary process,” Hartney says.

If you’re set on leaving a grandkid money, consider creating a trust and naming the child’s parents as trustees, she says. This way, there’s some authority in place while the grandchild has a resource for their future.

Another possible approach: With your children’s permission, talk to your grandkids about personal finance and charitable giving, so they can learn more about saving, investing and spending wisely. While the kids may want cash, you’re giving them something more valuable, Hartney says: “life lessons, bonding experiences, and emotional and psychological resource-building that can serve them their entire lives.”

7. False expectations

Your kids think you’ll be leaving them caviar and champagne, but all they’ll be getting is pretzels and beer.

You may be embarrassed about your finances, but it’s critical to shatter any illusions, says Lehman. If you delay, your children may make unrealistic financial plans, “only to have the rug pulled out from them,” he says.

“I’ve been privy to one too many situations where a family is counting too heavily upon inheritance to make their own retirement scenarios achievable,” Arnold says.

Even if you have no cash to pass on, you’ll do your family a great service by planning who gets any items of sentimental value.

Andre Rucker

“In my private practice days, one of the most contentious disputes involved Beanie Babies,” says Mitchell. They didn’t have great resale value, he says, “but the siblings fought over their parents’ collection because there was no will specifically covering that property.”